Accounting Standards: IFRS 3, IAS 38, and ASC 805
Intangible Asset Masterclass — Lesson 8 of 10
The valuation methods covered in Lesson 7 produce numbers. Accounting standards determine what happens to those numbers — which assets are recognised on the balance sheet, how they are measured initially and subsequently, and how their values flow through the income statement over time.
Three standards are central to intangible asset accounting: IAS 38 (Intangible Assets), IFRS 3 (Business Combinations), and ASC 805 (the US GAAP equivalent of IFRS 3). This lesson covers the key requirements of each, the practical differences between them, and the compliance considerations that CFOs, investors, and advisors need to navigate.
Accounting standards create asymmetries that significantly affect how intangible assets appear on financial statements. Internally generated brands and customer relationships cannot be recognised, but acquired ones must be. IFRS requires annual goodwill impairment testing while prohibiting amortisation, while US GAAP now allows private companies to amortise goodwill. These differences directly affect reported earnings, balance sheet strength, and the comparability of financial statements across jurisdictions and business histories.
The Three Standards at a Glance
Standards Scope Comparison
| Standard | Jurisdiction | Scope | Key Focus |
|---|---|---|---|
| IAS 38 | IFRS (international) | All intangible assets — purchased and internally generated | Recognition, measurement, amortisation, impairment |
| IFRS 3 | IFRS (international) | Intangible assets acquired in business combinations | Identification and fair value measurement in PPA |
| ASC 805 | US GAAP | Business combinations (equivalent to IFRS 3) | Similar to IFRS 3 with some differences |
| ASC 350 | US GAAP | Intangible assets (equivalent to IAS 38) | Goodwill and other intangibles — post-acquisition |
| FRS 102 s18 | UK GAAP | Intangible assets for UK private companies | Simplified IAS 38 with some differences |
IAS 38: Recognition and Measurement
IAS 38 establishes the rules for when an intangible asset can be placed on the balance sheet and how it is measured both initially and over its life.
Recognition Criteria
An intangible asset is recognised if and only if:
- It is probable that future economic benefits attributable to the asset will flow to the entity
- The cost of the asset can be measured reliably
For purchased intangible assets — including those acquired in a business combination — the recognition criteria are presumed to be met. The asset is recognised at its fair value on the acquisition date.
For internally generated intangible assets, recognition is more restrictive. IAS 38 divides the creation process into two phases.
Research Phase
- All expenditure must be expensed
- Cannot be capitalised under any circumstances
- Examples: original investigation, evaluation of alternatives, searching for new knowledge
Development Phase
- Expenditure must be capitalised if ALL six criteria are met
- Technical feasibility demonstrated
- Intention to complete and use/sell
- Ability to use or sell the asset
- Probable future economic benefits
- Adequate resources to complete
- Expenditure reliably measurable
IAS 38 contains explicit prohibitions on recognising certain internally generated assets. Internally generated brands, mastheads, publishing titles, customer lists, and items similar in substance may not be recognised as intangible assets — regardless of the investment made to create them. This prohibition reflects the view that the cost of creating these assets cannot be reliably distinguished from the cost of developing the business as a whole.
Subsequent Measurement
After initial recognition, IAS 38 permits two models.
| Model | Measurement | When Used |
|---|---|---|
| Cost model (default) | Cost less accumulated amortisation and impairment | Most common in practice |
| Revaluation model | Fair value at revaluation date less subsequent amortisation and impairment | Only permitted when an active market exists for the asset; rarely used |
IFRS 3: Business Combinations
IFRS 3 requires that in a business combination (acquisition), the acquirer must identify and separately value all intangible assets that meet the recognition criteria — even if the target company did not recognise them on its own balance sheet.
This is the critical asymmetry in intangible asset accounting. A company cannot recognise its own internally generated brand. But when that company is acquired, the acquirer must recognise the brand at fair value.
The PPA Process
1. Determine the purchase price
The total consideration transferred — cash, shares, contingent consideration, and any previously held equity interest — valued at the acquisition date.
2. Identify all assets acquired and liabilities assumed
This includes tangible assets, financial assets, identifiable intangible assets, and all liabilities. Each is measured at fair value on the acquisition date.
3. Recognise identifiable intangible assets separately from goodwill
Any intangible asset that meets the identifiability criterion (separable or arising from contractual/legal rights) must be recognised separately, even if not on the target's balance sheet. Use the valuation methods from Lesson 7 — RFR for brands and technology, MPEEM for customer relationships, W&W for non-competes.
4. Calculate goodwill as the residual
Goodwill = Purchase price - Fair value of identifiable net assets (tangible + intangible - liabilities). Goodwill is not amortised under IFRS but is tested annually for impairment.
Goodwill: The Residual Asset
Goodwill captures everything that has value but cannot be separately identified: the assembled workforce, synergies expected from the combination, the target's market position, and any premium paid for competitive or strategic reasons.
| Aspect | IFRS Treatment | US GAAP Treatment |
|---|---|---|
| Initial recognition | Residual after PPA | Residual after PPA |
| Amortisation | Not permitted | Not permitted (public companies); optional for private companies (ASU 2014-02) |
| Impairment testing | Annual, plus whenever indicators exist | Annual, plus whenever indicators exist |
| Impairment reversal | Not permitted | Not permitted |
| Level of testing | Cash-generating unit (CGU) | Reporting unit |
The prohibition on goodwill amortisation under IFRS (and US GAAP for public companies) is one of the most debated topics in accounting standards. Critics argue that goodwill inevitably declines in value over time and should be amortised. Supporters argue that successful businesses maintain or increase goodwill through ongoing investment. The IASB has been reviewing this issue since 2015 and, as of 2025, has tentatively decided to retain the impairment-only model.
IFRS 3 vs ASC 805: Key Differences
While IFRS 3 and ASC 805 are broadly aligned, several differences affect intangible asset accounting in cross-border transactions.
Standard Comparison Table
| Feature | IFRS 3 | ASC 805 |
|---|---|---|
| Contingent consideration | Remeasured at fair value each period; changes in P&L | Same treatment |
| Bargain purchase (negative goodwill) | Recognised immediately in P&L | Same treatment |
| In-process R&D | Recognised as intangible asset at fair value | Same treatment |
| Assembled workforce | Not a separately identifiable intangible | Same — absorbed into goodwill |
| Defensive intangible assets | Recognised at fair value even if acquired to prevent competitors from using | Same treatment |
| Measurement period | 12 months from acquisition date to finalise PPA | Same — 12 months |
| Step acquisitions | Remeasure previously held interest at fair value; gain/loss in P&L | Same treatment |
| Goodwill impairment | Two-step: compare CGU carrying amount to recoverable amount | Simplified: compare reporting unit carrying amount to fair value |
The practical implication for cross-border M&A is that the same acquisition can produce different balance sheet outcomes depending on whether the acquirer reports under IFRS or US GAAP — particularly regarding goodwill impairment testing methodology and the treatment of contingent consideration.
Amortisation: Useful Life and Method
Once an intangible asset is recognised, it must be amortised over its useful life (unless the useful life is indefinite).
Useful Life Determination
| Asset Type | Typical Useful Life | Basis |
|---|---|---|
| Customer relationships | 5-15 years | Customer attrition analysis |
| Technology / Software | 3-7 years | Technology refresh cycle |
| Brand / Trademark | 10-20 years or indefinite | Market relevance assessment |
| Patent | Remaining patent term | Legal life |
| Non-compete agreement | Agreement term (1-5 years) | Contractual term |
| Order backlog | Months to 2 years | Expected fulfilment period |
When Microsoft acquired Activision Blizzard for $68.7 billion in 2023, the PPA identified gaming franchise brands (Call of Duty, World of Warcraft) with useful lives of 15-20 years, customer relationships with useful lives of 7-10 years, and developed technology with useful lives of 3-5 years. The amortisation of these assets — totalling billions of dollars — would reduce Microsoft's gaming division's reported operating income for years after the acquisition, even though the underlying assets continue to generate cash flow.
The Earnings Impact
Intangible asset amortisation is one of the largest non-cash charges on acquiring companies' income statements. It reduces reported earnings without affecting cash flow, which is why many analysts adjust for amortisation when evaluating post-acquisition performance. Understanding this dynamic is essential for investors comparing organic growth companies (whose internally generated intangibles are not on the balance sheet) with acquisitive companies (whose acquired intangibles create large amortisation charges). The Opagio Valuator models this impact as part of its M&A scenario analysis.
Impairment Testing
Intangible assets with indefinite useful lives and goodwill must be tested for impairment at least annually. Intangible assets with finite useful lives are tested whenever there is an indicator that the asset may be impaired.
Impairment Indicators
| Indicator | Description |
|---|---|
| Significant decline in revenue from the related asset | Customer churn exceeding assumptions, technology displacement |
| Adverse change in legal or regulatory environment | Patent invalidation, regulatory restriction on use |
| Significant adverse change in market conditions | New competitor entry, price compression |
| Evidence of obsolescence | Technology superseded, brand reputation damage |
| Management decision to restructure or dispose of asset | Strategic pivot away from the asset's use |
The Impairment Process
Under IAS 36, the carrying amount of the asset (or the CGU containing goodwill) is compared to its recoverable amount — the higher of fair value less costs of disposal and value in use.
| If... | Then... |
|---|---|
| Recoverable amount > carrying amount | No impairment; no action required |
| Recoverable amount < carrying amount | Impairment loss recognised equal to the difference |
| Impairment of goodwill | Never reversed, even if recoverable amount subsequently increases |
| Impairment of other intangibles | Can be reversed (up to original carrying amount) if circumstances change |
Practical Compliance Considerations
For CFOs and their advisors, several practical issues arise in intangible asset accounting.
Common Compliance Challenges
| Challenge | Guidance |
|---|---|
| PPA deadline | IFRS 3 allows 12 months from acquisition date to finalise the PPA. Use this period fully — preliminary allocations may be adjusted retroactively within the measurement period. |
| Selecting a valuer | PPA valuations are typically performed by specialist firms (Big 4 valuation practices, boutique firms). The valuer should be independent of the transaction and experienced in the target's industry. |
| Audit readiness | Document all valuation assumptions, discount rates, useful life determinations, and royalty rate selections. Auditors will challenge each significant assumption. |
| Deferred tax | Recognising intangible assets in a PPA creates temporary differences that require deferred tax liabilities. This increases the net assets recognised and reduces goodwill. |
| Subsequent measurement | Establish amortisation schedules immediately post-acquisition. Monitor for impairment indicators on a quarterly basis. Annual impairment testing for goodwill requires up-to-date cash flow forecasts. |
The quality of a PPA directly affects financial reporting for years after the acquisition. A hastily prepared PPA that over-allocates to goodwill will result in lumpy impairment charges when business performance disappoints. A well-prepared PPA that rigorously identifies and values individual intangible assets provides predictable amortisation expense and a transparent view of what was actually acquired. Invest in the PPA — it pays dividends in reporting quality.
What Comes Next
With the valuation methods and accounting standards covered, we are now equipped to examine how intangible assets function in the context of M&A transactions. In Lesson 9: Intangible Assets in M&A Due Diligence, we cover the due diligence process for intangible assets — what acquirers look for, what sellers should prepare, and how intangible asset quality affects deal structure, pricing, and integration.
Ivan Gowan is CEO of Opagio, the growth platform that helps businesses and investors measure, manage, and grow intangible assets. Before founding Opagio, Ivan held senior technology and leadership roles across financial services and digital platforms for 25 years. Meet the team.